Moody’s says U.S. faces loss of Aaa without budget deal in 2013

Moody’s Investors Service said it may join Standard & Poor’s in downgrading the U.S.’s credit rating unless Congress reduces the percentage of debt-to-gross-domestic product during budget negotiations next year.

The U.S. economy will probably tip into recession next year if lawmakers and President Barack Obama can’t break an impasse over the federal budget and if the George W. Bush-era tax cuts expire in what’s become known as the “fiscal cliff,” according to a report by the nonpartisan Congressional Budget Office published on Aug. 22. The rating would likely be cut to Aa1 from Aaa if an agreement isn’t reached, Moody’s said in a statement.

Moody’s put the rating under review with a negative outlook in August 2011, when the U.S. pushed back a decision on spending and raised its so-called the debt ceiling after months of political wrangling. S&P cut its rating to AA+ that month, blaming the nation’s political process. Investors ignored the reduction and Treasuries rallied, with the yield on the benchmark 10-year note since declining to record lows and the S&P downgrade drawing the ire of investors such as Warren Buffett, the biggest shareholder of Moody’s, who said after the S&P decision that U.S. should be “quadruple-A.”

“At some point, we might see the market demand a higher yield premium to own Treasuries, but I don’t think that’s the case now as this is just a shot across the bow,” said Jack McIntyre, a money manager in Philadelphia at Brandywine Global Investment, which oversees $30 billion of debt. “It’s hard to find a bond market that has the depth of liquidity that Treasuries do.”

Deficit Watch

McIntyre said his firm has reduced its Treasury holdings to lock in recent gains. U.S. government debt has returned 6.4 percent since the S&P downgrade and gained 9.8 percent in 2011, the most since 2008, according to Bank of America Merrill Lynch index data.

The Obama administration’s February budget that was updated in August would result in a debt-to-GDP ratio of 75 percent in 2022, New York-based Moody’s said.

“We will wait and see what they do in 2013, whether or not they come up with a specific proposal,” Steven Hess, senior vice president at Moody’s in New York, said today in a telephone interview. “If there is no result and they delay doing anything serious on deficit reduction, it’s likely that in 2013 we would move the rating down.”

The budget deficit will reach $1.1 trillion this year, according to the CBO. That would be down from last year’s $1.3 trillion, in part because tax revenue has risen by almost 6 percent and spending is down by about 1 percent this year.